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The 5-Year Wait: One More Reason to Open a Roth IRA Now

If you’ve considered opening a Roth IRA but haven’t yet made the move, there’s one very compelling reason to get started now – and it goes beyond the customary tax and investment benefits that a Roth IRA may offer.

Sometimes referred to as the Roth “five-year rule,” it limits your flexibility in using earnings from your Roth IRA until the account has been funded for at least five years.i

While your contributions – the money you deposit into your Roth IRA – can be withdrawn at any time for any reason without taxes or penalties, the five-year rule applies to any money you may have earned on your investments within the Roth IRA. However, it’s up to you to monitor your account to determine whether you are tapping into your contributions or actually withdrawing earnings from your Roth IRA.

So, if you’d like the option of using your Roth IRA earnings without incurring taxes or penalties to cover important expenses such as retirement costs (after 59½), a first-time home purchaseii, or to provide tax-free income to your beneficiaries, the sooner you open a Roth IRA, the sooner you would be able to take advantage of those options.

Counting Down the Years

The five-year period starts with the tax year of your first contribution, but you can make that contribution as late as the mid-April tax filing deadline in the following year. In other words, a tax time Roth IRA contribution in April 2019 could be credited as a 2018 contribution, which would slice a year off the wait. Be aware that this must be designated as a carryback contribution; otherwise an April contribution would be credited to the current year.

A tax-year-2018 account start would mean that the earnings from your Roth IRA could be used for qualified purposes beginning in 2023.

If, over time, you open multiple Roth IRAs in addition to your original account, the 5-year period start date for all of them would revert back to that of your first account. If you’ve had a Roth IRA since 2017, and then open another in 2022, you wouldn’t have to wait to start making qualified withdrawals of the earnings in your 2022 account. Your five-year waiting period would have already elapsed. (For more on the five-year rule, see the IRS Publication 590-B.)

Traditional versus Roth IRAs – Same Goal, Different Route

There are two types of IRAs – traditional and Roth IRAs. More than a third of U.S. households have one or the other – and sometimes both – although relatively few account holders make regular contributions. Only about 12% of American households contribute to an IRA each year, even though most wage-earners would qualify to make annual contributions.iii (See: Traditional IRA vs. Roth IRA: Which is Right for You?)

Regardless of which type of IRA you choose, you would typically have the flexibility of allocating your contributions to a variety of investments, including a wide range of mutual funds and other securities that may offer the potential for long-term appreciation. However, keep in mind, not all investments increase in value, and may in fact lose money. While past performance is no guarantee of future returns, historically stock and bond markets have been volatile in the short term, but their performance has tended to even out over the long term as the economy moved through its various cycles.

You can contribute up to $5,500 to an IRA each year ($6,500 if age 50 or over) as long as your contribution doesn’t exceed your after-tax wages. In other words, you cannot contribute more than you earn to an IRA. However, you must meet certain income limitations to contribute to a Roth IRA, and to be qualified to deduct a traditional IRA contribution from your income taxes. For more on that, see IRS Contribution Limits.

You can spread that money to more than one account each year – including both a traditional and a Roth IRA – but the total of all of your contributions may not exceed the annual $5,500 limit (or $6,500 for over 50).

Which type of IRA is right for you? There are several distinctions between the two, as well as some similarities. Both are designed to encourage Americans to save and invest for retirement, and both provide tax-deferred growth on investment gains within the account.

Before you make your choice, you may want to compare the primary benefits and drawbacks of each:

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Key Differences

Traditional IRA

Roth IRA

Contributions may be deductible from your annual income, helping reduce your current taxes.

Contributions must come from taxable compensation and provide no tax benefit for the current year.

Qualified withdrawals at retirement age (after age 59 ½) are typically taxed at your ordinary income tax rate.

Qualified withdrawals at retirement age (after age 59 ½) are typically tax-free.

Required Minimum Distributions are mandatory beginning the year you turn 70½, and each year thereafter until the account is fully distributed. (See: Required Distributions)

There are no Required Minimum Distributions for Roth IRAsiv. Funds can sit in the account for as long as the holder is alve.

You may not contribute to a traditional IRA after you turn 70½.

There are no upper age limits on contributing to a Roth IRA.

You may roll over a traditional 401(k) to a traditional IRA tax-free, but to roll over a traditional 401(k) to a Roth IRA, you must pay taxes at your ordinary income tax rate.

Contributions may be withdrawn at any time without taxes or penalties even before age 59. (See:Roth IRAs)

If you’re leaning toward opening a Roth IRA – and you hope to tap into the earnings from your investments at some point in the next several years – the best time to take the leap and start the clock may be right now. (See: Benefits of Roth IRAs Go Well Beyond Retirement)

At Thrivent Mutual Funds, we recommend you consult your tax advisor to make sure you’re getting the most out of your investments. Thrivent Mutual Funds and their representatives cannot provide legal or tax advice.

i IRS Publication 590-B Distributions from IRAs.

ii Maximum $10,000 life time limit for first time home purchase

iii Investing Company Institute, "The Role of IRAs in US Households' Saving for Retirement, 2017."

iv Your beneficiaries would be subject to required minumum distributions.

Gain From Our Perspective

Gain From Our Perspective

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By clicking this checkbox, you agree to receive our Investing Insights electronic newsletter containing both marketing and educational content from Thrivent Mutual Funds. Note that choosing to receive the Investing Insights newsletter via email does not change any other preferences previously provided to other Thrivent entities regarding the receipt of email marketing.

Investing in a mutual fund involves risks, including the possible loss of principal. The prospectus and summary prospectus contain more complete information on the investment objectives, risks, charges and expenses of the fund, and other information, which investors should read and consider carefully before investing. Prospectuses are available at ThriventFunds.com or by calling 1-800-847-4836.

This website is not intended as a source for legal, accounting or tax advice or services. Work with your attorney and/or tax professional for additional information.

The principal underwriter for the Thrivent Mutual Funds is Thrivent Distributors, LLC. No communication or content, including investment analysis tools and information about the Thrivent Mutual Funds, on this website is intended to provide investment advice or recommendations of any kind and may not be relied upon as such. The communication and content found on this website, including investment analysis tools and information about the Thrivent Mutual Funds, are not intended as a solicitation to buy or an offer to sell any security. Thrivent Distributors, LLC has undertaken no review of the individual circumstances of any investor and makes no representations with respect to the suitability of any investment for a particular investor. Any purchase, sale or redemption of the Thrivent Mutual Funds will be executed through Thrivent Financial Investor Services Inc., the transfer agent for the Thrivent Mutual Funds, and an affiliate of Thrivent Distributors, LLC. Asset management services provided by Thrivent Asset Management, LLC. Thrivent Distributors, LLC. and Thrivent Asset Management, LLC. are wholly owned subsidiaries of Thrivent Financial for Lutherans, Appleton, WI.

Thrivent Distributors, LLC is a registered broker-dealer and member of FINRA and SIPC with its principal place of business at 625 Fourth Avenue South, Minneapolis, MN 55415.

Thrivent Financial Services, Inc. (TFSI) is the transfer agent for Thrivent Mutual Funds and the Thrivent Church Loan and Income Fund and maintains and services shareholder accounts. Pages on this website that include information about shareholder accounts are supported by the transfer agent.

No communication or content on this website is intended to provide investment advice or recommendations of any kind and may not be relied upon as such. This website is not intended as a source for legal, accounting or tax advice. Work with your attorney and/or tax professional for additional information.

Marketing and general information about Thrivent Mutual Funds and the Thrivent Church Loan and Income Fund on this website is provided by Thrivent Distributors, LLC, principal underwriter for the Funds. Thrivent Distributors, LLC is a registered broker-dealer and member of FINRA and SIPC with its principal place of business at 625 Fourth Avenue South, Minneapolis, MN 55415.